There is nothing unsavory, unethical, or illegal in helping sellers facing imminent foreclosure. You can be a responsible, helpful, ethical, and profitable real estate investor, never ever employing or resorting to the predatory tactics of others that give this worthy and often profitable niche such a black eye, often with good reason. It takes knowledge, persistence, and a philosophy of caring for others to be a successful pre foreclosure real estate investor. One who knows that success within this niche, as with any other real estate niche, requires preparation, planning, and effort and vigilance to avoid touted get rich quick strategies that are often just mere sizzle and no substance.
The key is to always make your efforts, your approach, your objective, to be about the sellers in distress, to be all about them, never about you. You must approach the owner facing default understanding where they are, get to know and appreciate with empathy their journey and their particular set of circumstances. By approaching them from the perspective of rescuing that distressed homeowner produces the win-win scenario that benefits them and you both. Most homeowners facing default are seldom aware of the options available to them depending upon their circumstances. They are, more often than not, unwilling or afraid to solicit and communicate with their lender when they are faced with the inability or the means to get or remain current with their obligation. Their issue is seldom due to being irresponsible. Unexpected circumstances, chance consequences, and unforeseen influences that befall the homeowner from divorce, to job loss, to failing health, to just about anything else never considered when the loan was made come into play. Bad things happen to good people.
You are not taking advantage of their plight, you are the solution. Most owners in foreclosure are almost always in a toxic state of denial. Suffering from depression, despair, anxiety, big time embarrassment, paralyzing shame, or overwhelming guilt, the emotional toll of all that is quite the psychological blow adding fuel to the fire of financial and practical pain. So much more than fear and despair, homeowners often grieve as they would for the loss of a beloved family member.
When I deal with sellers in this position, I have found it mindful to recall the six steps of grieving espoused by that eminent Swiss born psychiatrist Elisabeth Kubler Ross outlined in her treatise on “Death and Dying.” The grief cycle, originally recounted as five stages by Dr. Ross, now encompass the six stages of shock, denial, anger, bargaining, depression, then acceptance. For these sellers, the stages are very much the same and a compassionate empathetic investor will walk them through each stage to help them get to the level of acceptance where you can solve their problem and they can have confidence that you will.
Without practicing law or dispensing with legal advice, the savvy investor can, with empathy, assuage their pain and solve their problem. You provide them the caring counsel so they can see the light at the end of the tunnel. Most sellers have no idea of their choices. Some of these choices by the seller may have nothing to do with you from assistance eligibility to loan reinstatement or modification. Sellers may be able to avoid bankruptcy or just walking away. Other options may include a negotiated repayment plan, a short sale, or a deed in lieu of foreclosure. You can become their champion.
Few sellers understand or appreciate the breadth of the foreclosure process and the impact it will likely have on them beyond the home loss and their ultimate eviction, voluntary or otherwise. Most are unaware that that humiliation may be the precursor to the further indignity of damage to their credit, tax consequences, and even becoming subject to a deficiency judgment. Choices have consequences, some worse than others. Seasoned investors will recount the conventional wisdom that the options of a short sale or a deed in lieu of foreclosure will be more credit beneficial that a bankruptcy. Then there is the potential of an income tax or capital tax liability being assessed as they lose their home to foreclosure. The way the seller deals with the foreclosure can be tax consequential. If there is a deficiency after all is said and done, the amount of the deficiency may be considered taxable income to the seller in default. There are even instances where the homeowner is assessed taxable capital gains if his or her adjusted tax basis on the house is less than the sales price and yet exceeds the one time exclusionary limits afforded the homeowner that may be applicable.
Then there remains the possibility of an assessed deficiency judgment on top of everything else. This is where the homeowner still owes the lender money after all is said and done. State law controls as it does with the process of foreclosure. Whether or not a deficiency judgment can be levied depends upon applicable state law, whether the state is a judicial or non judicial foreclosure state and whether the loan is deemed a recourse or non recourse loan under applicable law.
The seasoned real estate investor knows only to get involved after doing his or her due diligence and making certain there exists a win-win scenario in the final analysis. Convincing the homeowner you offer a better outcome than any other alternative the homeowner may choose is but one half of the equation. You are operating a business not a charity. That homeowner must be made to understand that by you giving them more than they can get otherwise, you still must make a profit to make this work and be as much a win for you as well as for them.